Cable combat: It's sports vs. operators

Cox dukes it out with ESPN -- can both sides afford war?

By

DavidB. Wilkerson

SAN FRANCISCO (CBS.MW) -- For cable television companies that are dependent on sports-crazed subscribers, the stakes are high when a network phenomenon like ESPN pushes its demands at the negotiating table.

Sports networks like ESPN and Fox must pay ever-higher prices to obtain the rights to broadcast the action of premier leagues like the NFL, NBA and baseball. As a result, they're demanding that cable and satellite operators like Cox
COX, +62.86%
and DirecTV help foot the bills.

However, cable operators already face staggering debts. After spending several billions of dollars to upgrade their systems for the digital age, the cable industry is mindful of investors hungry for results from that costly overhaul.

That leaves cable companies determined to cut one of their most dramatically-escalating costs -- sports programming, or they will have to pass those costs on to cable subscribers.

Cox vs. ESPN

Cox Communications has been perhaps the most vocal in making the cable distributor's case, publicly objecting to proposed fee increases by the likes of ESPN, owned by Walt Disney
DIS, +0.99%
or Fox Sports, part of News Corp.
NWS, +1.23%
Although Cox's negotiations with Fox Sports ended with a six-year deal, its battle with ESPN rages on.

As heated as things have become between sports programmers and the cable companies that carry their events to consumers, the situation will probably be resolved before federal regulators have to step in, industry experts say.

"At the end of the day, it doesn't do anybody any good to go to war over this," said Craig Moffett, cable analyst at Sanford Bernstein & Co. in New York.

As existing contractual agreements expire over the next few years, both sides will face mounting pressure to come to peace.

Cox says ESPN is boosting the fees Cox is required to pay for the right to carry the sports network's programming by as much as 20 percent over the previous year's fee. Cox wants to pay less than that or relegate ESPN, a veteran of basic cable service, to a special pay tier, so that Cox can generate both local ad revenue and additional subscriber fees.

But ESPN denies that the rate increase is as high as Cox claims, and says that the costs the cable giant is passing on to its customers have more to do with its own overhead expenses than programming costs. Further, the cable channel says, the local advertising revenue cable operators are able to generate because of ESPN's highly desirable demographic profile -- males 18-49 years old, in large measure -- offsets most of the affiliate fee increases.

ESPN and other sports outlets compete fiercely for the right to carry the games of various professional leagues. Disney is in the midst of an eight-year NFL deal that started in 1998, under which ESPN and ABC pay $1.15 billion per year. In their new NBA contract, ESPN and ABC will pay an average of $400 million over six years. As of Dec. 31, 2002, Disney's commitments to sports rights contracts totaled $10.2 billion.

"The gun is at both of their heads, but neither can afford to pull the trigger," said Harry DeMott, a partner at Gothic Capital Management in New York. "ESPN is too big a channel for Cox to yank, and DirecTV and [fellow satellite giant] EchoStar
DISH, -0.90%
will have a field day marketing to the disaffected.

"For ESPN, they need the subs and the fees they bring alone, as well as the viewership they sell to advertisers. Losing the Cox systems would be a disaster on this front," DeMott said.

Financial terms for Cox's new deal with Fox Sports weren't disclosed, but the rate increase Cox ultimately agreed to reportedly was considerably more modest than Fox's original demand.

Critics of News Corp.'s pending acquisition of DirecTV say the satellite TV company's new parent might its newly acquired distribution clout to turn up the heat on cable operators in an attempt to drive more subscribers to DirecTV. But when U.S. regulators approved the deal, they clear that such blatantly anti-competitive behavior wouldn't be tolerated.

Fox's accord with Cox could be one indication that News Corp. is taking that condition seriously -- at least for now.

Comcast's way

Comcast Communications
CMCSK
the nation's largest cable operator with nearly 22 million subscribers, has the clout to be a very tough negotiator in any wrangling over fees paid to programmers. But in the area of sports programming, it has quietly taken a different approach.

While many nationally-televised sports telecasts get lackluster ratings, a popular local team can draw consistently high numbers, even, in some cases, if that team isn't a contender for a league title. It's a lesson Fox and Liberty Media understood when they launched regional sports networks many years ago, and it's why other cable operators may follow the examples set by Comcast and Cablevision Systems
CVC, +0.31%
which showcases a number of sports teams in the New York metropolitan area.

But cable carriers remain under pressure to rein in prices, which rose 5.1 percent in the 12 months that ended last June 30, more than twice the rate of inflation, according to the Federal Communications Commission.

One of the big reasons for this is the rising cost of sports programming. Cable companies' costs of carrying sports rose by an average of 59 percent in the previous three years, vs. 34 percent for all programming, according to a General Accounting Office study last fall that pointed to the effects the sports channels.

At the same time, however, the GAO concluded that putting sports channels - and other expensive networks - on a separate tier, or allowing subscribers to pay for only the specific channels they wish, might create as many problems as it would solve.

Without broad exposure to all the customers who take basic cable service, such channels would generate less advertising revenue, the report said. Combined with the added equipment expense needed to allow a la carte channel delivery and billing, the approach would actually increase cable operators' costs.

"So there isn't a very clear intermediate remedy," said Moffett. "And a regulatory solution is probably not justified, because the market is getting truly competitive between cable and satellite."

"I don't think the regulators will ever step into this mess," said DeMott, "unless you get to the point where a station gets pulled, then someone might get involved, as they did with Time Warner and ABC a number of years ago in Houston."

In perhaps the most infamous disagreement of this type, Time Warner's
TWX, -0.24%
cable unit for two days in 2000 blocked the signals of ABC stations in New York, Los Angeles, Philadelphia, Houston, Raleigh-Durham, N.C., Fresno, Calif., and Toledo, Ohio, because of an impasse over how much the cable operator had to pay to carry Disney-owned channels. After the FCC stepped in and declared that Time Warner violated federal regulations when it pulled the plug on ABC in those markets, the signals were temporarily restored. Eventually, the two sides agreed on a seven-year deal that many observers thought to be favorable to Disney.

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information. Intraday data
delayed per exchange requirements. S&P/Dow Jones Indices (SM) from Dow Jones & Company, Inc.
All quotes are in local exchange time. Real time last sale data provided by NASDAQ. More
information on NASDAQ traded symbols and their current financial status. Intraday
data delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. S&P/Dow Jones Indices (SM)
from Dow Jones & Company, Inc. SEHK intraday data is provided by SIX Financial Information and is
at least 60-minutes delayed. All quotes are in local exchange time.